At Least the 'Cliff' Won't Come a Surprise

Note: Helene Meisler will be on vacation for the rest of the week. Her next column will appear Monday, Nov. 26.

On Tuesday, I was asked whether I thought the U.S. would go over the "fiscal cliff." I do not have high hopes that the folks in Washington can get a deal done without someone putting a gun to their heads -- so, for those who remember the vote for the Troubled Asset Relief Program, I have no visions of that kind of scenario playing out again.

For those who don't recall, in fall 2008, Congress voted down TARP -- and the markets tanked. I'd like to think that this is what changed congresspeople's minds, as it then passed on a re-vote. The big difference between now and then is that this "fiscal cliff" situation has been well-known in advance. A person had to have lived under a rock to be unaware it exists. If an investor has a fear of it, they will sell in advance; unlike the collapses of Lehman and AIG (AIG) in 2008, it won't come as a surprise.

It seems to me that, when there's a deadline for a potentially market-moving event, the market can anticipate and process it in advance. Before the currently impending fiscal cliff was Y2K in 2000 and -- as those of us who have been around for 20 or more years will remember -- the First Gulf War deadline of Jan. 15. The problems arise when it comes as a surprise, and folks haven't anticipated it.

Turning to the market at present, stocks remain oversold. Tuesday's breadth was once again a highlight in an otherwise flat market -- even when the indices were down, it was relatively mild on the downside. This better breadth is helping the McClellan Summation Index attempt to finally stabilize and turn upward. It will take a few more days of positive breadth to trigger a reversal, but at least it has begun to halt its decline.

Elsewhere, if you think emotions are not running high in the market, consider this. Last week the put-call ratio was above 100% for three days running. That's reflects fear. Even Friday's reversal had the ratio above 100% as many fought the tape. After Monday's giant-sized gains, there seemed to be plenty of folks willing to throw their hats into the bull ring as this sentiment ratio sank to low levels. With Tuesday's choppy-to-down day, the ratio soared to 110%. That tells us folks were scoffing at the day's action, which would be bullish for the markets.

Before you settle in to a comfort zone with the market, just take a look at the put-call ratio of the CBOE Volatility Index (VIX), which chimed in at a whopping 147%. Wow. We have not seen a reading like that since May 25. I have circled that on the chart -- you have to admit it looks eerily similar to today's oversold rally.

This could all be holiday-related. But I think it tells us that, once the market is back to the overbought side of the ledger, the indices are likely to head back down again.